Trend reversal or no trend reversal? Thursday's action sparks big debate.

The municipal customer base evaporated yesterday and prices shuddered, sending trend reversal shock waves through the Street.

The session actually opened on an upbeat note, after initial state unemployment insurance claims increased 6,000. The positive tone was short-lived, however, and the mood began to sour on worries about foreign interest rate cuts. The Bundesbank cut its discount rate to 5.75% from 6.25% and its Lombard rate to 6.75% from 7.25%, effective today, causing concern that U.S. investment dollars would head overseas.

Downward pressure increased by mid-morning after the Federal Reserve Bank of Philadelphia's manufacturing survey showed improvement. The survey's general activity diffusion index, which was negative in three of the previous four months, increased from a level of 0.7 in September to 15.1 this month, the Fed bank said.

The bid for government bonds weakened dramatically as the day wore on, fueled by the morning's negative news, higher commodities prices, and rumors of a major short in the market.

Municipal prices were 1/8 to 1/4 point weaker by mid-morning, in sympathy with the Treasury market's woes. But the bid for bonds began to disintegrate by mid-afternoon when bonds from new issues were freed to trade and buyers were nowhere to be found.

"Everybody is paralyzed and confused," one trader said. "Greed has taken a back seat here as the customer base has evaporated."

By session's end, prices were quoted 1/2 point lower overall, but bonds lost more in spots, depending upon the name. For example, in secondary dollar bond trading, Los Angeles DEWAP 5s of 2033 were quoted down 1/2 point on the day at 94 3/8-3/4 to yield 5.34%; Valdez, Alaska 5 1/2s of 2028 were down 3/4 at 99 3/4-100 to yield 5.51%; and Atlanta 4 3/4s of 2023 were down 5/8 at 5.22%-lock.

In the debt futures market, the December municipal contract settled down 30/32 and at its session low, down from a high of 106.04. The MOB spread narrowed to negative 469 from negative 482 on Wednesday as the government contract fell further than tax-free futures.

In the short-term note sector, yields rose as much as 10 basis points on the day. In late trading, California Rans were quoted at 2.75% bid, 2.71% offered; New York City notes were quoted 2.62% bid, 2.58% offered; Pennsylvania notes were 2.72% bid, 2.68% offered.

As the bottom appeared to drop out, there was speculation that the market was undergoing a major trend reversal.

"People are starting to speculate that we hit a major top and we're in for a major correction," one player said. "The move that started Nov. 8 of 1992 when the long bond was 7.80% to last week's 5.78% low is over. That's the big worry here. Whether or not that is true is anybody's guess. But it's sloppy enough out there where you know people are worried."

But other traders said the market had simply rejected the historically low yields set recently and was re-establishing a new base and begin a new siege on those lows.

"We haven't established a trend reversal yet, but we've probably tapped the highs and rejected them," a trader said. "We've been in this range for a while, although it's been hard to tell. We've still got a number of technical support levels and we'll continue to see lower yields in the long-run. It's just going to be harder to push the rock from here."

Other traders echoed that sentiment. They said the market should still enjoy the benefits of a weak economy, and that the market's troubles are mostly based on supply problems.

"Technical problems are driving this. It was just a bad day," a trader said. "As long as we're in an environment with low inflation and no job growth we'll find fundamental reasons to do better."

Nevertheless, reflecting the evaporation of demand yesterday, bonds from a $425 million Florida Board of Education deal led the market downward.

A Goldman, Sachs & Co. group won the full faith and credit public education capital outlay refunding bonds with a true interest cost of 5.2244%.

But prices prices dropped anywhere from 3/4 to 1 1/8 point almost immediately after Goldman freed the bonds from syndication to trade in the secondary. Near session's end, the maximum term bonds, the 5 1/8 of 2018 were quoted at 98 1/8-5/8 to yield 5.26%. They were originally reoffered to investors at 5.17%; the 2022 term was quoted at 97 3/8-98 to yields 5.30%, where it was originally reoffered at 5.20%; and the 2023 maturity was quoted at 98 3/8-7/8 to yield 5.30% to yield 5.30%. It was originally reoffered at 5.24%.

The Florida Board of Ed offering included a 2018 maturity, containing $188 million, reoffered with a coupon of 5.125% to yield 5.17%; a 2022 term, containing $142 million, was reoffered as 5 1/8s to yield 5.20%; and a 2023 maturity, containing $94 million, was reoffered as 5.20s to yield 5.24%.

Goldman reported all bonds sold near session's end.

The issue is rated double-A by Moody's Investors Service and Fitch Investors Service.

In light negotiated new issue action, Goldman priced $147 million New York State Energy Research and Development Authority facilities refunding revenue bonds for the Consolidated Edison Co. of New York.

The Con Ed offering included $128 million non-AMT bonds priced as 5 1/4s to yield 5.276% in 2020 and $20 million AMT bonds priced at par to yield 5.375% in 2022.

Con Ed said yesterday it would purchase the bonds from bondowners in what resembles a tender offer as opposed to an advance refunding. The bonds are rated Aa2 by Moody's and AA-minus by Standard & Poor's.

Fitch Rates South Carolina

Fitch yesterday awarded South Carolina's upcoming $289.8 million general obligation refunding bond issue a AAA rating, the first time the agency has rated the state's GOs.

Fitch also affirmed South Carolina's $864.9 million of outstanding GOs at AAA.

"South Carolina's superior credit standing rests on its careful and conservative approach to both debt and financial operations," Fitch said in announcing the rating. "The provision of strong security arrangements and an absence of credit extension together with a low debt burden create an excellent debt position."

South Carolina's GO debt is also rated triple-A by Moody's. In February, Standard & Poor's downgraded the state's GOs to AA-plus from AAA, citing the erosion of its fiscal position over the previous four years.

In yesterday's release, Fitch acknowledged that the state has been adversely affected by the national recession and Hurricane Hugo, but it also said that the state's fiscal condition had improved in the past year, as spending has been reduced and revenue collections have improved.

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